Beijing’s mixture of political and economic priorities may not result in
an overall Belt and Road policy formula that is workable.

Christopher
Whalen

A great deal of attention is being paid by Western media to China’s
ambitious Belt and Road Initiative, the most ambitious foreign-policy
initiative yet for paramount leader Xi Jinping. Launched in 2013 under the
slogan "One Belt, One Road,'' the effort involves China spending billions of
dollars on infrastructure projects in countries along the old Silk Road linking
it with Europe.

The ambition of Xi is immense, but it is largely driven by insecurity.
Western media parrots China’s propaganda about the Belt and Road Initiative.
"Its ultimate aim is to make Eurasia (dominated by China) an economic and
trading area to rival the transatlantic one (dominated by America),'' reports the Economist.

But in fact the motivations for China are far more simple and direct
than this grandiose vision suggests. Viewed through the prism of China’s
economic progress over the past decade, the Belt and Road program is merely a
continuation of China’s massive internal investment in infrastructure – only on
a larger scale.

China is spending roughly $150 billion annually to build roads, rail
lines and other infrastructure in sixty-plus countries that have signed up to
the scheme. The obvious question is whether China can support such a gigantic
effort.

In 1958, Mao announced the "great leap forward,'' a program grounded upon
the Marxian prescription for the advancement of industrial technology which
ultimately resulted in the deaths of between twenty million and forty million
Chinese nationals. Christopher Balding, writing for Bloomberg View, questions the financial logic of Xi’s version of the "great
leap forward'' of the Maoist period:

China's just-completed conference touting its Belt and Road initiative
certainly looked like a triumph, with Russian president Vladimir Putin playing
the piano and Chinese leaders announcing a string of potential deals and
massive financial pledges. Underneath all the heady talk about China
positioning itself at the heart of a new global order, though, lies in
uncomfortable question: Can it afford to do so?

Foreign analysts often try to understand Chinese thinking and priorities
using the commercial and economic logic of the West, but, in fact, asking
whether China can afford the Belt and Road effort is to ask the wrong question.
In the minds of China’s leaders, who fear political instability above all else,
the real question is whether China can afford not to spend more tens of
billions on infrastructure projects to keep the country’s restive population
under control.

Going back to President Xi’s meeting with President Donald Trump earlier
this year and his carefully scripted defense of free trade, the Chinese leader
is clearly focused on creating new channels to absorb China’s massive
overcapacity. "Trade is the important engine of economic development,” Xi said
at a summit of world leaders in Beijing that was largely ignored by the United
States, European nations and India.

But, in fact, it is investment flows, not trade, that dominates the
economic relationship between the United States and China. The key challenge
facing China is not how to generate greater trade flows, especially away from
its primary partner the United States, but how to allocate investment flows
given the dearth of attractive investment opportunities in China.

Just as Germany channeled its surplus savings to the nations of Southern
Europe, China has been allowing its citizens to invest trillions of dollars in
the United States, Canada and other nations, often focused on direct investment
in companies and real estate. Over the past five years, for example, Chinese
nationals ploughed $1 trillion into foreign real estate and other assets.

"The most important economic truth to grasp about the U.S. trade deficit
is that it has virtually nothing to do with trade policy,'' noted Daniel
Griswold of the Cato Institute in testimony before Congress two decades ago. "A nation’s
trade deficit is determined by the flow of investment funds into or out of the
country. And those flows are determined by how much the people of a nation save
and invest – two variables that are only marginally affected by trade policy.''

Thus, when we look at China’s massive investment in infrastructure
outside of its own borders, we see the imperative of the Chinese Communist
Party (CCP), namely political stability. Measured in economic terms, many of
China’s supposed "investments” along the Silk Road don’t make a great deal of
sense.

But viewed from the political perspective of employing China’s people
and the accumulation of unused capacity inside the Chinese economy, the Belt
and Road makes perfect sense. Beijing’s mixture of political and economic
priorities will not necessarily result in an overall policy formula that is
actually workable. Note for example, the November 2016 decision to impose barriers on foreign investments by private
individuals and companies.

The de facto currency controls are slowing the outward flow of
investment – and dollars – from China, a change that has negative implications
for the value of the U.S. currency, the United States real estate market and
also implies a weaker Chinese renminbi (RMB).

As we have noted in previous articles for the National Interest, the
Chinese RMB has been under pressure to depreciate against the dollar. China’s
central bank sold over $1 trillion in U.S. Treasury bonds to provide the
dollars to slow down the decline (by buying RMB). Indeed, over the past several
years China’s massive foreign currency reserve shrank from $4 trillion to $3
trillion as the country’s nationals went on a spending spree acquiring real
estate and commercial assets in the United States and other nations.

With the imposition of currency controls last year, however, China’s
posture as a net investor around the world is changing. The propaganda
headlines of the Belt and Road Initiative suggest a massive capital outflow to
other nations, but, in fact, just the opposite is the case. Indeed, the South
China Morning Post reports that Beijing's strict capital controls are delaying
private investments that are part of the Belt and Road project.

First and foremost the importance of China’s Belt and Road Initiative is
political, namely to show President Xi Jinping in control of China’s command
economy as he consolidates political power as dictator of China and the
unquestioned leader of the CCP. Under Xi, the era of collective leadership in
China is well and truly at an end.

But second – and more important – the continuing effort by China to
"pump prime'' internal economic activity via gargantuan infrastructure projects,
both at home and abroad, reveals a basic flaw in the Chinese economy. Only when
the political monopoly of the CCP has ended and China’s people are truly free to
make economic and political choices will the country be able to provide
sufficient investment opportunities at home so that desperate measures such as
the Belt and Road spectacle will no longer be necessary.